Tags: Stockman | Fed | LBO | tax

Stockman: 'Stock Buybacks, LBOs Are the Bastard Offspring of the IRS and Fed'

By    |   Tuesday, 21 April 2015 08:00 AM

One element of the Federal Reserve's massive easing program that doesn't get much attention is the ramification for leveraged buyouts (LBOs), and former White House budget director David Stockman is concerned.

"Financial engineering is one of the worst ills perpetuated by the Fed's regime of cheap debt and money market subsidies for speculation," he writes on his blog.

"And these deformations are turbo-charged by the tax code which creates a powerful bias toward loading capital structures with tax deductible debt, and to delivering returns as lightly taxed capital gains rather than ordinary income. In fact, stock buybacks and LBOs are the bastard offspring of the IRS and Federal Reserve."

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008, and its balance sheet has ballooned to $4.5 trillion through quantitative easing.

"It would be safe to say that in an honest free market with a neutral tax regime, LBOs in particular would be as rare as a white buffalo," Stockman explains.

"That's because they inherently cause waste, inefficiency and mal-investment — the opposite of market-driven results. These deadweight losses to society are, in turn, the product of a symbiotic arrangement of convenience between avaristic private equity managers and institutional investors."

Meanwhile, Wall Street Journal reporter Greg Ip says the Fed is partly responsible for the sluggish economy. GDP grew only 2.2 percent in the fourth quarter, and the Atlanta Federal Reserve's forecasting model puts growth at only 0.1 percent for the first quarter.

"The growth deceleration should not come as a surprise, because the Fed has already tightened," Ip writes.

"True, the Fed's interest-rate target remains close to zero. But the Fed tightens through its words, not just its actions, and the drumbeat of chatter from the Fed in the last year has made it clear that officials plan to start raising rates sometime this year."

That talk has put a lid on the stock market. It also has sent the dollar soaring to multi-year highs against a range of currencies, putting a dent in exports and corporate earnings.

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One element of the Federal Reserve's massive easing program that doesn't get much attention is the ramification for leveraged buyouts (LBOs), and former White House budget director David Stockman is concerned.
Stockman, Fed, LBO, tax
349
2015-00-21
Tuesday, 21 April 2015 08:00 AM
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